Japanese Proverb: No Money, No Action. No Action, No Satisfaction

The chief reason for the recent decline of the fortunes of Japanese automakers was not, as posited by pop pundits, the recalls or the tsunami. It was something more insidious, something regularly overlooked by most outsiders and many insiders. It was a reduction in development spending – an eventually deadly bottom line therapy also popular by cash-starved American peers. Japanese automakers have realized the error of their ways and have returned to funding the finding of that insanely great next generation car.

In the wake of the “Lehman syokku” or “Lehman shock” as they usually refer to the 2008 financial crisis in Japan, Japanese automakers drastically reduced R&D spending in an attempt to shore-up their bottom line. This is a tried & true tactic in the industry: if a disaster hits, cut R&D and advertising. The cashflow-positive effect of both is as immediate as snorting cocaine. The negative effect will not be felt until years later. In many cases, the problem is shifted to the next generation of managers who now have to sell tired technology to unenthused customers. The best medicine for car sales is new cars. Old cars are slow acting, but sure poison. A car takes 3 to 5 years to develop, medicine and poison become felt after long delays.

The epicenter of the “Lehman syokku” was America, and three years after, the American market is still wobbly. Car companies most exposed to the syokku – American and Japanese – put spending into crisis mode. European companies were far less affected and mostly maintained their spending level. This explains why Volkswagen, Daimler, BMW et al are riding high, and why the friskiest Japanese car company is Nissan with its ties to European Renault. Three years after the syokku, we are beginning to feel the effect in earnest, and it will stay with us for a while until it is digested.

Japanese companies are reaching for the antidote: Increased R&D spending.

“Seven automakers plan to spend 2.09 trillion yen, up 10 percent from fiscal 2010,” reports The Nikkei [sub]. Converted to today’s dollars, that’s $38 billion, a good chunk of money. Japanese markers are “racing to develop the next-generation of environmentally friendly vehicles as well as low-priced models for emerging nations.”

Nissan for instance is seen increasing its R&D spend by 15 percent to 460 billion yen ($5.8 billion). Honda plans to spend more than 500 billion yen ($ 6.5 billion),” aggressively developing budget cars for emerging countries.”